How does MiFID II influence OTC derivatives contract management

By Anastasia Dokuchaeva, Head of Partnerships at ClauseMatch
on 18 Jan, 2018
MiFID II, the revised markets in financial instruments directive, will usher in a new global era. On January 3rd, 2018 MiFID II brought into effect over 1.4 million paragraphs of rules for the financial sector, initiating a transformation in compliance that will take years to implement.
It is the largest and most sweeping regulatory regime in a generation. It will change market structure, influence investment behaviour, create new technological infrastructure, and require extensive regulatory compliance, reporting, record keeping and storage. It will affect everyone from banks and fund managers to brokers and pension funds. After MiFID II, business as usual will not be an option.

The original markets in financial instruments directive focused exclusively on EU equity markets. MiFID II has a broader scope and it will affect a wider range of financial instruments. Most notably it will have a seismic effect on the near $500 trillion OTC derivatives market. Remediating this enormous amount of derivative documentation to ensure regulatory compliance, as well as understand, manage and mitigate your exposure to financial risk, is an incredible challenge. Organizations who are not prepared will face serious non-compliance issues with regulators. Given the vastness of the derivatives market, the impact of bad or missing data is incalculable, not to mention the cost of missed opportunity. Repapering derivatives documentation to comply with new regulatory regimes is an essential first step to mitigating market risk to maximise profitability and create a competitive advantage.

In essence MiFID II is about transparency — specifically transparency regarding the transmission of financial risk. The directive aims to shift trading away from verbal communication over the phone and in person, to a virtual engagement, where all transactions leave an indelible footprint for the purposes of audit and compliance.

Logic suggests that greater transparency in financial markets means greater liquidity. However, manually repapering, amending or remediating the hundreds of thousands of OTC derivatives contracts to comply with MiFID II can actually reduce overall market liquidity. The costs and obvious inefficiency of manually managing a banks compliance can be punitive. For some companies it may prove impossible.

Ultimately, the financial sector needs to commit to a paperless future. An intuitive smart document platform is not only a tool for proving compliance, it streamlines complex workflows, saves time and resources, removes human errors, uncover hidden risks and provides better insight for senior management.

In the highly competitive and complex world of global financial derivatives, how well you understand your contractual book of business can tip the balance between success and failure. In an age of overwhelming regulation, smart document management could make that difference.

This article was first published here

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